Tuesday, May 29, 2012

New initiatives to expand and promote entrepreneurship in Western Massachusetts
have been launched and angels including Paul Silva are leading the charge two hours west of the nearest Red Line station.

“Startup hubs like Silicon
Valley, Boston, and a few others offer vibrant ecosystems that nurture
companies from seed to harvest. But most of us don't live in one of
these hubs!” says Paul Silva, manager of
the River Valley Investors . “Entrepreneurs can migrate to these areas, but
they first need to get enough momentum to make it worthwhile. Most
entrepreneurs don't start out that way - they have lives
and families and responsibilities tied to another geography. So the startups never start.

“In an ideal world, there
would be a vibrant ecosystem to support the formation of startups everywhere.
Then, when the ventures were mature enough, they’d migrate to another area if that made sense.
We can't all be Silicon Valley - nor should we try. But we can all
work to make our own communities as supportive of the entrepreneurial spirit as
possible.

“Over the past 10 years my
community, the Pioneer Valley (AKA Western Massachusetts), has succeeded in
building a great "intro to entrepreneurship" academic structure at
all of the colleges and universities (thanks in large part to the work of the Harold Grinspoon
Charitable Foundation). But when our top students finished the
class... then what? They could certainly use more academic training, but
what they really needed was real-world experience. They
needed mentoring.

“The UMass Amherst
Entrepreneurship Initiative saw this problem and reached out to its friends
(especially Steve Willis of Common Angels)
to create Valley
Venture Mentors, a venture mentoring program inspired by the MIT
Venture Mentor Service. We launched it in February of 2011 and it has
been a runaway success. We have dozens of mentors helping almost a dozen
exciting startups ranging from nonprofits to high tech and everything
in-between.”

How it works: put
the right people in the same room, give them just enough structure, and
facilitate beneficial collisions. The program meets monthly so that
mentors have a chance to build real relationships and see how the ventures
evolve over time. Between the monthly sessions mentors give as much, or
as little, time to each venture as they feel appropriate, with no long-term
commitments or expectations. The program's leadership monitors mentors
and entrepreneurs that choose to deepen their relationship.

These monthly events are designed to generate excitement. In crisp seven minute
presentations the entrepreneurs tell their stories and ask for help in
addressing specific hurdles. During the second part of the session, the
mentors divide up in separate rooms with the entrepreneur of their choice, and
begin to plan, create, and problem-solve. Each meeting includes a mix of former
presenters and debut appearances.

The mentoring program is open to angels, but also to
non-accredited investors that meet the group's criteria. This
openness has brought in an amazing group of folks who have made a real impact
on the entrepreneurs we are helping. The mentoring program is not meant
to be a funnel for investments - the companies are too raw and early... but we
don't complain is one is a good fit for investment. “One team recruited
its CTO from our mentors and will be presenting to my angel group next month,”
says Silva. “This is a team that didn't
have a chance at raising money six months ago - it was just a URL and a concept
on paper.

“The model has proven extremely scalable and cost-effective. It is far too
early to tell, but it is our hope that we have a model that can easily be
replicated in other geographies.”

Entrepreneurs praise this program. “They’ve
helped me make critical decisions and move forward to make this business become
a reality. says Marcie Muehlke, founder
of Joya Bride. “It would have been a lot more difficult and
slower without them.” Muehlke was one of
several VVM startups, mentors, and founders to be featured in BusinessWest on
the impact VVM has had in growing the local entrepreneurial ecosystem. To
read the full article, visit here.

A key component of the
ecosystem is the River Valley Investors angel group, co-founded by Joseph Steig in 2003. Paul Silva joined
in January of 2004 as an associate, becoming
manager of the group in 2005. He became prominently visible in the region about three
years ago, when he took on responsibility for screening deals for our NE ACA regional syndication meetings. Since January of this year, he has served as
principal organizer of these meetings.

Most
recently, Silva has been named associate director of the UMass Amherst Center
for Entrepreneurship and Innovation Management, a new center dedicated to
helping students create new products, services, and ventures.

With the creation of this new Center, funded by the Isenberg School of Management, “there
are finally resources to achieve some of the dreams many of us have had for
UMass for many years, “ says Silva, himself a graduate with a BS in
computational physics (2000). “The new
position is half time, so I continue to serve as executive director of Valley Venture Mentors and as
Manager of my angel group the River
Valley Investors in the other half. I sadly had to step down from a number
of exciting positions to make room, but I believe it will prove well worth it.”

Of his work in total, Silva says “It is early days, but they are
exciting ones. And I think if we can do it here in Western MA with the
models we are using; it is possible for lots of other regions of the country to
help their entrepreneurs get started.´

What should he tackle
next? Maybe a Red Line stop on the Smith
College Campus adjacent to the new engineering school, thus joining the Pioneer Valley to America's Technology Subway. Watch this space.

Tuesday, May 22, 2012

TechStars Boston Demo Day
videos available.

Even if you were not one of the select 800 who attended TechStars Demo Day
earlier this month, you can still watch the thirteen official videos. “It was a
great celebration of entrepreneurship,” says Managing Director Katie
Rae.

“I have linked to videos of the presentations
below. If you find a company interesting and want to keep an eye on them,
please contact the CEO and ask to be added to their update list. Many of
the companies have funding rounds coming together soon, if you would like to
take part please reach out so they can make room for you.

“Lastly, applications for our next Boston session
are open now, please encourage great startups to apply at apply.techstars.com.”

Monday, May 21, 2012

This is an interesting portrait of
Angels. More and more start-ups are looking to ‘angels’ for seed (and
beyond) financing, even though they know that angels can complicate future
rounds of financing. Buried within all of these statistics one that
caught my eye is only 6000 companies sold for $10m or more. Also, we can
assume that the ‘80-20’ rule applies to angel investing meaning that you need
to work very hard to raise a little money. Based on recent experiences in
CEO Roundtable it seems that high net worth individuals are currently a
preferred source of financing, especially in biotech. VC investing is
returning to some sectors – those that are currently in fashion like high tech
(a new bubble?) and healthcare.

I was inspired this week by Scott
Kirsner’s article – Mass.
IPOs don’t create many angel investors. I thought it would be interesting
to pull a few facts and estimates together for our entrepreneurial community. I
think these numbers bust a few myths and may surprise some prospective
investors.

1. There were 318,000 active angel investors in the US last year up some
20%. (Center
for Venture Research)
2. They invested $22.5Bn up 12.1%. (Center for Venture Research)
3. This implies an average angel investment of $70,755. (Center for
Venture Research) (larger than I would have guessed)
4. The $22.5Bn was invested across 66,230 companies, an increase of 7.3%,
implying an average deal value of $339,725, 4% increase. (Center for
Venture Research) (larger than I would have guessed)
5. The sectors attracting that money were in order: Software 23%,
Healthcare 19%, Industrial/Energy 13%, Biotech 13%, IT Services 7%, Media 5%.
(that’s 80% of it) (Center for Venture Research)
6. Angel investments that exited in 2011 did so 54% of the time by
selling out and 24% of the time by going bust. (Center for Venture Research)
7. In addition to this analysis, the first ever HALO
Report issued by CB Insights in conjunction with Silicon Valley Bank and
the Angel Resource Institute attempts to dig deeper into Angel Groups not just
individual angels. Their analysis provides even further insight to Angel
GROUPS. Specifically these groups invested $873m in 2011. (which implies
to me 4% of the total market investment above of $22.5Bn)
8. The $873m was invested in 573 deals at an average deal value of $1.5m
and a median value of $700,000, up a whopping 40% increase over 2010.
These seem really high to me.
9. Regionally the $873m was spent in order: California 21%, Great Lakes
15.5%, New England 14.6%, Southeast 12%, Southwest 8.9%, Mid Atlantic 8.9%,
Northwest 7.2%, New York 6.6%, Great Plains 4.1%.
10. Sectors wise Angel Groups spent their money 37.4% of the time on
Internet and 23.5% on Healthcare, that’s 61% right there. Mobile picked up
10.4% and Energy 4.3%.
11. The active Angel Groups were named by Halo as: Tech Coast Angels –
Southern California, Golden Seeds CA, MA, NY, Band of Angels (great name) Menlo
Park CA, Central Texas Angel Network, Austin, TX and Launchpad in Boston, MA.

Conclusions

1. I’m quite surprised there as
many as 318,000 active angel investors given how few businesses sell out every
year for $10m or above (6000) thus creating US angel investors.
2. I suspect there is a Powers Law curve at play and that a tiny % of big
hitters of the 318,000 are skewing the average towards $70k.
3. We need to conduct more research to understand the make up of 318,000 active
investors compared with only 573 deals tracked by the Halo Report of active
Angel Groups.
4. I worry that at both the macro $22.5Bn level and the smaller sample of
Angel Group level there remains a dominant software & healthcare mentality
at the expense of Energy, Media and IT services. It almost implies that
software and healthcare are less risky than other sectors or perhaps the
management teams just tell a better story!

Wednesday, May 16, 2012

Back in the mid-1970s, at the University of New
Hampshire, Bill (Prof. William) Wetzel was researching how new companies raised
startup funds. His studies uncovered a
new class of investor: high net worth
self-made individuals who were willing to take greater risks or accept lesser
returns than others. More importantly, these investors provided more than money;
they provided the benefit of their experience, which was often of more value
than the amount of money they could invest.
A typical investor would develop a portfolio of four or five companies,
typically located within a day’s drive of his home.

But what to call these patrons? It occurred to Wetzel that these investors had
much in common with the legendary angels of Broadway, who supported young artists
out of a sincere interest in promoting the careers of talented people.

Thus Wetzel began to call his business investors
“angels.” “We didn’t originate the term,
we stole it from Broadway,” he says.
Then along came Inc. Magazine, where the term first appeared in print in
an article, “The Truth about Angels, More Than a Myth.” Thus did we become angels, are angels, and
most likely will be called angels in the future, as the term becomes even more institutionalized
in the names of many angel groups and in
internationally recognized trade groups,
such as our Angel Capital Association.

Epilog: How art thou fallen from heaven, O Lucifer,
son of the morning! Isaiah 14:12

Most Broadway angels have faded from memory, but
here in the Northeast the fame, or rather notoriety, of one particular angel
may serve us as a cautionary tale.

Harry Frazee, a well-known Broadway angel, added the
Boston Red Sox to his portfolio in 1916. The team, which won the World Series
in 1918, was stocked with great players, including a young pitcher/hitter named
Babe Ruth.

But by 1920 Frazee’s finances were depleted, so he
sold Babe Ruth to the New York Yankees for $125,000 in cash and a $300,000
mortgage on Fenway Park. No trade, just
cash. In rapid order, Frazee, who had purchased the Red Sox for $500,000, sold
and traded additional players for at least $155,000. In 1923 he sold the team,
now the worst team in baseball.

With money from the Ruth sale, Frazee backed several
Broadway plays, one of which, when rewritten as a musical comedy, became “No No
Nanette,” the biggest hit of the era. Once again Frazee was rich, but in the minds
of my parents and grandparents generation, he became the most despised man in
Boston history.

So what Had Frazee become? He had bought a great
team, sold off the assets, destroyed the hopes of millions of fans young and
old, while enriching only himself. Had
he passed in rapid succession through angel investing into venture capital and
straight on to private equity? They say that just because a vegetarian starts
eating meat doesn’t mean he has to go all the way to cannibalism. All we know for certain is that from 1920
onwards, Harry Frazee was most assuredly
Ruth-Less.

The Red Sox didn’t win another World Series for 86
years, a drought often called “The Curse of the Bambino.”

Friday, May 11, 2012

The
Launchpad Venture Group reports record investments in 2011. “We invested in 20
companies last year. Nine of the investments
were in new companies and 11 were follow-on investments. This was
about double our pace from prior years,” says Managing Director Ham Lord. Total
invested was $4.4 million.

“Already,
2012 is starting off fast with 3 new investments and 7 follow-on
investments. And, we are actively fund raising for a fourth new
deal,” he says.

The
UNH Center for Venture Research reports that total angel investments in 2011
increased 12.1 percent over 2010; ventures receiving angel funding increased
7.3 percent. Based on the success of Launchpad, and the earlier record
results reported by the Common Angels, it appears that our local angels may
be far exceeding their peers in other regions.
Does any other group wish to report in?

Launchpad
is now the largest angel investing group in the Northeast, with more than 90
active members coming from a variety of backgrounds and professions, including
the technology, financial service, industrial and life science
communities. Launchpad currently
focuses on investments in the technology and life-science spaces and select
opportunities in the green space.

Tuesday, May 8, 2012

How can we explain the incredible
shrinking venture capital industry and the disappearance of many venture funds
before our very eyes? In an article, “How Venture Capital is Broken,” Felix
Salmon of Reuters recommends a new Kauffman Foundation study.

“I read quite a lot of papers about finance
and investing, but I can’t remember the last time I came across a 52-page paper
which I simply devoured, avidly, reading every word, and even following the footnotes,”
says Salmon. “ But such is the latest
publication from the Kauffman Foundation, on the foundation’s own experiences
in the world of venture-capital investing. This is required reading for all
institutional investors with any kind of exposure to VC, and I sincerely hope
that it succeeds, at least at the margin, in forcing those institutional
investors to behave a bit more like investors, and a bit less like chumps being
bullied into throwing millions of dollars into a series of opaque black boxes
delivering decidedly subpar returns.”

As we angel group members know well, The
Kauffman Foundation, created to encourage entrepreneurship, has contributed
significantly to the development of the angel community and to the formation of
the Angel Capital Association. Apparently, its endowment currently stands at $1.83
billion. Of that, $249 million is invested in VC and growth equity funds; the
foundation has been investing in VCs for 20 years now. “As a rich, long-term
institutional investor devoted to the cause of early-stage companies, the
Kauffman Foundation is — or should be — pretty much the perfect LP as far as VC
funds are concerned. And indeed, over the years, it has invested in 100 such
funds, and therefore now has a spectacular real-world backward-looking dataset
of VC returns from an LP perspective,” says Salmon.

“This is the kind of dataset that money,
literally, can’t buy: VC funds’ investment agreements have such tight
confidentiality clauses that Kauffman and other institutional investors would
never be allowed to share this information with anybody else. But by
anonymizing their data, and by self-critically coming clean on their own
returns from venture capital, Kauffman’s investors have managed to put together
a detailed and compelling report with a very simple conclusion: venture capital
is not much of an asset class, and insofar as it is an asset class,
it’s very, very broken.

“Over the past 20 years, net of fees,
Kauffman has been paid out 1.31 times, on average, the amount that it invested
in any given fund — well below the standard “venture rate of return” of twice
committed capital. The payout is meant to come after no more than 10 years, but
the 10-year figure is honored mainly in the breach: Kauffman alone has 23 funds
more than 10 years old, and eight funds more than 15 years old. One fund, at
age 19, still retains more than 20% of the capital that Kauffman committed way
back in 1992.”

It appears to me that over the very long term,
those few angels I know who maintain rigorous records and share them have earned returns far exceeding the numbers in this report. I’ll
have to refresh my memory, but I recall that George Schwenk of the Breakfast
Club and the late Luis Villalobos of the Tech Coast Angels both generated long
term net returns exceeding twenty-nine per cent.

Friday, May 4, 2012

TechStars Demo Day is certainly the talk
of the town today, particularly among start-up investors and entrepreneurs. Thirteen companies presented to an audience
of 500 investors, half Angel, half VC, yesterday. Premier tech journalist Scott
Kirsner estimates that the speakers had lined up commitments of $5.5 million before
the meeting even started. I
doubt our venerable City on a Hill has ever seen the likes of this event before;
there will be another one coming up at the end of the year.

TechStars is what a called an accelerator in that it
provides workspace, advice, and that most scarce of resources, cold hard cash,
to fledgling entrepreneurs. Companies
accepted into the program receive $18,000 in seed funding in return for six
percent of their stock. They are also offered an additional $100,000 in
convertible debt. Participants get free office space for the duration of the
three-month program, mentoring, and the opportunity to present to a group of
investors at its conclusion.

TechStars is a relatively new concept. It was
founded in Boulder by David
Cohen, Brad Feld, David Brown, and Jared Polis in 2006. In
2007, I invited CEO David Cohen to speak at our regional angels’ syndication
meeting here in Portsmouth, NH. In 2009,
Bill Warner, impressed with the program’s success in Boulder, pushed Cohen and
Feld to clone the program here in Boston.
About six months ago Katie Rae became the Managing Director here. The results
are both obvious and gratifying. Congratulations to all involved.

Some brief thoughts.
If you are an entrepreneur, work even harder. This program is
exceedingly competitive, only one per cent of the applicants for this session
were accepted. And buy a Charlie Card, you'll be going to lots of seminars and meetings.

If you are an angel investor, keep searching.
Without good connections, you’ll most likely be shut out of these particular financings. But since these companies
represent only one per cent of those applying, search for pearls among the other ninety-nine per cent. Look particularly
at local companies that might not fit the TechStars profile.

Thursday, May 3, 2012

Common Angels Announces
New Investment Record in 2011; 2012 on a Similar Pace. Last year with 21 rounds in 17 startups, the
Common Angels funded the most companies in their 13-year history.

“This
year is on a similar pace, with five investments already to date. We will
announce a few new deals soon once those companies are market ready.

“For
follow-ons, we had substantial participation in a new $12.4M financing round in
March for mobile app management rockstars, Apperian. The startup has seen
tremendous success with its cloud-based platform, Enterprise App Service
Environment (EASE), and we're thrilled to be a part of their continued growth!”

These results support the surge in angel investing reported elsewhere. Common
Angels is in a way our regional flagship in that they have the most money under
management. They are also one of our
largest groups, although Lanchpad has recently passed them in membership.

Additionally, they are one of our oldest groups still
operating, founded after The Breakfast Club and Walnut Venture Associates and just before the
eCoast Angels and Launchpad.

About Me

George McQuilken is a founding member of the eCoast Angels Network, a group of private investors backing early-stage companies.

McQuilken was founding CEO of four companies including RSA Security. As Editor of the IBM Systems Journal, he published many of the seminal papers on software management, measurement, security, and quality. He was a project leader at IBM’s Cambridge Scientific Center working on virtual machines and networking. He is a graduate of MIT and member of the IEEE and the ACM.